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21. C H A P T E R. Consumer Behavior and Utility Maximization. LAW OF DIMINISHING MARGINAL UTILITY. Utility Defined Subjective Nature Difficult to Quantify. Total Utility. Marginal Utility. graphically examined. Observe Diminishing Marginal Utility. TOTAL AND MARGINAL UTILITY. TU. - PowerPoint PPT Presentation
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21 - 1Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
Consumer Behavior andUtility Maximization
21C H A P T E R
21 - 2Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
LAW OF DIMINISHINGMARGINAL UTILITY
• Utility Defined• Subjective Nature• Difficult to QuantifyTotal UtilityMarginal Utility
graphically examined...
21 - 3Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01234567
010182428303028
10 8 6 4 2 0 -2
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
TU
MU
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
21 - 4Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
THEORY OF CONSUMER BEHAVIOR
A Typical Consumer...• Exhibits Rational
Behavior• Has Clear-Cut
Preferences• Subject to a Budget
Constraint• Responds to Price
Changes
21 - 5Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
THEORY OF CONSUMER BEHAVIOR
Utility Maximizing Rule
The consumer’s money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal) utility
illustrated...
21 - 6Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
21 - 7Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
Algebraic Restatement of theUtility Maximization Rule
MU of product A
Price of A
MU of product B
Price of B=
UTILITY MAXIMIZING COMBINATION
21 - 8Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Deriving the Demand Schedule and Curve
• Preferences or Tastes• Money Income• Prices of Other Goods
Given from the previous example schedule:
21 - 9Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Create a demand schedule from thepurchase decisions as the price of the product is varied ...
Price per unit of B Quantity Demanded
$2 4 1 6
Graphically…
Deriving the Demand Schedule and Curve
21 - 10Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Deriving the Demand Schedule and Curve
Quantity Demanded of Good B
Pri
ce p
er u
nit
of
Goo
d B $2
1
0 4 6
DB
21 - 11Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Deriving the Demand Schedule and Curve
Quantity Demanded of Good B
Pri
ce p
er u
nit
of
Goo
d B $2
1
0 4 6
DB
21 - 12Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
APPLICATIONS AND EXTENSIONS
The Compact Disc Takeover
The Diamond-Water Paradox
The Value of TimeMedical Care PurchasesCash and Noncash GiftsChapter Conclusions
